> For banking there is a reason for regulation, and it is precisely deposits. Deposits are open to runs. Runs are bad for all sorts of reasons. Financial crises are runs. Hence we have banking regulations. That's not a defense of current banking regulation. But there is a problem and a reason for some regulation.
> But fintech doesn't take deposits. The one central problem with banking is gone.
All banking regulations are due solely to the fact that banks take deposits? There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated? All financial crises are runs on deposits?
Pretty undeveloped and unconvincing reasoning. If you think for a few seconds it’s easy to imagine other situations that led to necessary regulations in banking.
"At its core, our financial crisis was a systemic run. The run started in the shadow banking system of overnight repurchase agreements, asset-backed securities, broker-dealer relationships, and investment banks. Arguably, it was about to spread to the large commercial banks when the Treasury Department and the Federal Reserve Board stepped in with a blanket debt guarantee and TARP (Troubled Asset Relief Program) recapitalization. But the basic economic structure of our financial crisis was the same as that of the panics and runs on demand deposits that we have seen many times before.
"The run defines the event as a crisis. People lost a lot of money in the 2000 tech stock bust. But there was no run, there was no crisis, and only a mild recession. Our financial system and economy could easily have handled the decline in home values and mortgage-backed security (MBS) values—which might also have been a lot smaller—had there not been a run.
> At its core, our financial crisis was a systemic run. The run started in the shadow banking system of overnight repurchase agreements, asset-backed securities, broker-dealer relationships, and investment banks.
Note how none of these things are consumer deposits. Fintech and shadow banking are two names for the same thing, and the same risk of runs and need for regulation applies.
I should've said fintech is a subset of shadow banking, because not all shadow banks are tech-oriented. But a fintech company is more-or-less by definition a non-bank doing bank-like things, which is the definition of a shadow bank.
Derivatives pricing and real estate pricing were major causal factors in the last financial crisis. A lot of the banking regulations regarding reporting, data integrity etc. are if anything even more important when the data analysis is being done by a separate entity from the one that's performing the transactions.
The run he's describing there is fundamentally the same as a run on retail banks. Retail banks in the US are pretty much run-proof due to the FDIC, but that's not the case for the shadow banking system.
It's completely wrong. 2008 didn't come from a run on the bank, it came from a collapse in value of assets used as collateral for other assets, triggering widespread bankruptcy, triggering collapses in assets backed by the loans written off in those bankruptcies, triggering more bankruptcy by owners of those assets, triggering collapses in assets backed by loans those institutions had... You get the point. Deposits were totally irrelevant. Investments were overleveraged across the board.
Banking crises can come from any form of leverage. It doesn't matter what the original collateral is, whether it's deposits or private investment. All you need is for losses to exceed collateral at a large scale. In 2008, this came from a chain reaction, which is the main point of broad limits on leverage, and that risk absolutely applies to fintech.
Not sure what you're getting at. They may use leverage, depending on the niche. As far as how, same way anyone else does. They use an asset as collateral to buy more of another asset (or they offer a service to do so).
>> But fintech doesn't take deposits. The one central problem with banking is gone.
> All banking regulations are due solely to the fact that banks take deposits? There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated? All financial crises are runs on deposits?
FWIW, the way I interpreted this was “crises are caused by over-leveraged systems becoming insolvent”, which sounds less wacky.
I can think a few:
- Deposits (you would want your money back)
- Mortgages and loans (money lent was your deposit, you might want to ensure that borrowers observe a certain criteria to ensure repayment, and priced accordingly so the loan pool can cover eventual defaults)
- Preventing Money Laundering and Terrorism funding
- Forcing Banks to provide you with enough data about investment products so you don’t end up gambling your savings on leveraged derivatives
Having worked in Financial Services for 20 years (both Banks and Fintech), and being aware any broad generalization is unfair, I can tell you a lot of the flack Banks get it’s due to regulations they would shed on a snap, while fin techs choose to skip them altogether.
Lending to unbanked, unprivileged minorities sounds great on The brochure and is hard to argue against. The part they leave out is the money they are lending belongs are the lifelong savings of a 80-year old couple snared on the promise of safe, 2% returns, and then tell them than most micro-loans defaulted and their lost their capital.
Rules are there for a reason. They are cumbersome, archaic and way too many, but If you remove them, consumers will end up hurt.
And the US Banking system is not a great benchmark as it is borked.
> There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated?
He boils it all down to crises, but that's not the sum total of what can go wrong with this kind of thing. Look at something that another kind of "fintech" has been doing for years: predatory lending via payday loans. Usury is real, and usurers prey upon those with the least financial literacy in stressful times when they are vulnerable. Credit cards and lines of credit similarly can be extended to people who may not realize truly what they're getting themselves into, or who may have no choice given their circumstances.
It is for these situations and these people that we need additional regulation in order to save people from terrible crushing debt.
I don't want them to get loans. They can't pay back the loans, so why should they get loans? It's not like people use loans to buy bread, they use them to buy things they don't really need.
> All banking regulations are due solely
> to the fact that banks take deposits?
Yes! Ability to take deposits is pretty much the definition of a bank[0]. So, by definition, all banking regulations are due to banks' ability to take deposits.
There are other financial regulations that apply to wider ranges of financial businesses (e.g. those related to detecting and preventing money laundering), but these are not specific to banks. Given that they apply to businesses that aren't banks, they can't be considered 'banking regulations'.
[0] I'm not from the US, so this UK reference was easier to find than a US equivalent: https://www.bankofengland.co.uk/statistics/data-collection/i...
If you want a list of banks in the UK, you will look at the Monetary Financial Institutions (MFI) list, which lists
'all banks and building societies who have permission to accept deposits in the UK.'
> But fintech doesn't take deposits. The one central problem with banking is gone.
All banking regulations are due solely to the fact that banks take deposits? There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated? All financial crises are runs on deposits?
Pretty undeveloped and unconvincing reasoning. If you think for a few seconds it’s easy to imagine other situations that led to necessary regulations in banking.